Withdrawal from taxable account question.

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bearwithme
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Withdrawal from taxable account question.

Post by bearwithme »

Me wife and I have been contributing to a taxable account for several years in hopes of someday using the proceeds to help purchase property. We are getting to the point where we are close to making that purchase (next year or maybe two). My question is in regards to the actual withdrawal from the taxable account, since we have never withdrew anything from the account. How is this taxed? Subject to your ordinary income tax? If so, should we plan to withdraw a portion during 2021 and then another in 2022 so we don't jump tax brackets? As you can see, we have been great about the contribution part, but not do much the withdraw part so a lot of rookie questions lol.

Thanks in advanced BH's!
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LilyFleur
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Re: Withdrawal from taxable account question.

Post by LilyFleur »

At Schwab, we can look at the cost basis for various purchases. That way you can strategize about paying the taxes and select the lot that you want to sell.

If you're at Schwab, you can use the chat function online and get more information about this, 24/7. Be sure to save the chat.
livesoft
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Re: Withdrawal from taxable account question.

Post by livesoft »

Withdrawals are taxed as described in IRS Publication 550 with numbers that you enter on IRS Form 1040 Schedule D and the tax worksheets associated with it. Key terms: Long-term capital gains, Long-term capital gains tax, Cost basis. You may also have Short-term capital gains and Short-term capital gains tax.
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Rager1
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Re: Withdrawal from taxable account question.

Post by Rager1 »

You'll be subject to capital gain tax rates, not income tax rates.

In the worse possible case, you'll be subject to 20% long term capital gains rate (Federal-- + State tax rate if it applies). The gain is calculated on the difference between your cost basis and your proceeds.

Ed
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GerryL
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Re: Withdrawal from taxable account question.

Post by GerryL »

I was long the same kind of rookie. I kept investing in a taxable account and never withdrawing. Twenty-five plus years later I still haven't withdrawn, but I now know a little about the tax consequences.

You will owe taxes on the gains your investment in a taxable account has had. So if you bought shares at $40 and withdraw them when they are worth $50, you will owe taxes on $10 for each share you sell. The original cost you paid is called the cost basis. (That was a term I didn't know until years after I started up the taxable account.)

In order to estimate your taxes when you sell shares, you need to decide which share lots you will sell so you know what your cost basis is for the sale. The assumption is that you have been keeping a record of all your purchases, including reinvested dividends.

You will have different options for your sale: SpecID -- you select specific share lots for which you know the cost basis -- gives you the most control over taxes you will need to pay. (The others are first-in-first-out and average.)

For shares that have been owned for at least a year, you get a more favorable tax rate -- LTCG, long-term capital gains.

That is the basics. Others on this forum will be able to get into more detail.
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22twain
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Re: Withdrawal from taxable account question.

Post by 22twain »

bearwithme wrote: Sat Nov 20, 2021 3:04 pm How is this taxed? Subject to your ordinary income tax?
I assume these are mutual funds, ETFs or individual stocks. In this case you pay tax on the capital gain: the difference between what you paid for the shares and what you sell them for. If you have owned the shares for less than a year, the gain is taxed the same as ordinary income. If you have owned the shares for more than a year, you get the more favorable long term capital gains rate: 0% if your total taxable income (after subtracting the standard or itemized deduction) is less than about $80K; 15% if your taxable income is between about $80K and $500K; and 20% if above that.
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delamer
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Re: Withdrawal from taxable account question.

Post by delamer »

If you’ve held an asset for a year (or more) and then sell it, you’ll pay taxes on the difference between the sale price and the cost basis. That’s assuming the asset increased in value.

That federal tax will be 0%, 15%, or 20%, depending on your other income. And you could be subject to the NIIT.

You also may owe state/local tax.

Try using tax software or an app like TaxCaster to understand your situation.
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bearwithme
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Re: Withdrawal from taxable account question.

Post by bearwithme »

Thank you everyone for taking the time for your replies.
22twain wrote: Sat Nov 20, 2021 3:20 pm
bearwithme wrote: Sat Nov 20, 2021 3:04 pm How is this taxed? Subject to your ordinary income tax?
0% if your total taxable income (after subtracting the standard or itemized deduction) is less than about $80K; 15% if your taxable income is between about $80K and $500K; and 20% if above that.
Are these income levels individual or joint tax filings?
sycamore
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Re: Withdrawal from taxable account question.

Post by sycamore »

bearwithme wrote: Sun Nov 21, 2021 6:42 am Thank you everyone for taking the time for your replies.
22twain wrote: Sat Nov 20, 2021 3:20 pm
bearwithme wrote: Sat Nov 20, 2021 3:04 pm How is this taxed? Subject to your ordinary income tax?
0% if your total taxable income (after subtracting the standard or itemized deduction) is less than about $80K; 15% if your taxable income is between about $80K and $500K; and 20% if above that.
Are these income levels individual or joint tax filings?
The "about $80k" number is for MFJ.

The Bogleheads wiki article has a table with the taxable income levels by filing status info: https://www.bogleheads.org/wiki/Capital ... and_beyond
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GMCZ71
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Re: Withdrawal from taxable account question.

Post by GMCZ71 »

bearwithme wrote: Sun Nov 21, 2021 6:42 am Thank you everyone for taking the time for your replies.
22twain wrote: Sat Nov 20, 2021 3:20 pm
bearwithme wrote: Sat Nov 20, 2021 3:04 pm How is this taxed? Subject to your ordinary income tax?
0% if your total taxable income (after subtracting the standard or itemized deduction) is less than about $80K; 15% if your taxable income is between about $80K and $500K; and 20% if above that.
Are these income levels individual or joint tax filings?
This little calc gets you close for Fed not State

https://engaging-data.com/tax-brackets/

It has 4 inputs so pretty simple.
John
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Wiggums
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Re: Withdrawal from taxable account question.

Post by Wiggums »

bearwithme wrote: Sat Nov 20, 2021 3:04 pm Me wife and I have been contributing to a taxable account for several years in hopes of someday using the proceeds to help purchase property. We are getting to the point where we are close to making that purchase (next year or maybe two). My question is in regards to the actual withdrawal from the taxable account, since we have never withdrew anything from the account. How is this taxed? Subject to your ordinary income tax? If so, should we plan to withdraw a portion during 2021 and then another in 2022 so we don't jump tax brackets? As you can see, we have been great about the contribution part, but not do much the withdraw part so a lot of rookie questions lol.

Thanks in advanced BH's!
Taxable accounts are subject to short and long term capital gains.

Roth conversions are taxed as ordinary income.
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Wiggums
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Re: Withdrawal from taxable account question.

Post by Wiggums »

bearwithme wrote: Sat Nov 20, 2021 3:04 pm Me wife and I have been contributing to a taxable account for several years in hopes of someday using the proceeds to help purchase property. We are getting to the point where we are close to making that purchase (next year or maybe two). My question is in regards to the actual withdrawal from the taxable account, since we have never withdrew anything from the account. How is this taxed? Subject to your ordinary income tax? If so, should we plan to withdraw a portion during 2021 and then another in 2022 so we don't jump tax brackets? As you can see, we have been great about the contribution part, but not do much the withdraw part so a lot of rookie questions lol.

Thanks in advanced BH's!
Taxable accounts are subject to short and long term capital gains.

Roth conversions are taxed as ordinary income.
Investors need to be better informed about the costs they pay. “High fund fees can be hazardous to your wealth in the same way that high calories can be hazardous for your health.”
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grabiner
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Re: Withdrawal from taxable account question.

Post by grabiner »

Note that in a taxable account, what is taxed is the sale, not the withdrawal. If you paid $10K for a stock fund, and you sell the fund for $20K, you owe tax on the $10K capital gain ($1500 in most tax brackets), regardless of what you do with the proceeds. If you put the sale proceeds in a money-market fund, and later transfer cash from the money-market fund to your bank account, no tax will be due on that transaction.

Thus, if it makes sense to split the capital gain between 2021 and 2022 (because some of the gain will be taxed at a higher rate if you sell all in 2022), you can do that and leave the money in the brokerage account.

One important possible misconception:
bearwithme wrote: Sat Nov 20, 2021 3:04 pm should we plan to withdraw a portion during 2021 and then another in 2022 so we don't jump tax brackets?
Moving into the next tax bracket is not a major cost, because only the amount in that bracket is taxed at a higher rate. Thus, if you try to take a capital gain in 2021 equal to the top of the 15% capital gains bracket, but your actual gain is $1000 too much, only that $1000 is taxed at 20%, a loss of $50 compared to taking the same gain in 2022 at 15%. (The 3.8% Net Investment Income tax will probably apply to the gain either way.)

(edited to fix formatting)
Last edited by grabiner on Sun Nov 21, 2021 3:10 pm, edited 1 time in total.
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aristotelian
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Re: Withdrawal from taxable account question.

Post by aristotelian »

In addition to what others have said, you can also withdraw shares at a loss and get a tax deduction up to $3k (with excess carried over to future years). This is referred to as tax loss harvesting.

There are various ways to calculate cost basis used to determine the amount of taxable gains. Specific ID selecting specific lots) gives you the most control
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bearwithme
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Re: Withdrawal from taxable account question.

Post by bearwithme »

Again, thank you all for all your replies and the tools provided. As always, BH's have provided me a great opportunity to learn something new.



I understand the tax portion will be paid from the difference of the sale value and the cost basis. This account is being held at Vanguard and I have explored their website trying to determine the cost basis. For example, I opened the account and it solely consisted of Total Stock Market. That was 5+ years ago. During that time we made consistent purchases of shares.....so is the cost basis the price of the shares of when I opened it? Or does it apply to each "batch" of shares we purchased during that time? I have a feeling it is the latter. So if so, I don't see an option on Vangaurd that would allow me to sell shares I have held for over a year. The option I see is I can sell in a dollar amount or a share amount.....but who's to say those shares I am selling wasn't purchased last week compared to years ago?
delamer
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Re: Withdrawal from taxable account question.

Post by delamer »

bearwithme wrote: Mon Nov 22, 2021 1:14 pm Again, thank you all for all your replies and the tools provided. As always, BH's have provided me a great opportunity to learn something new.



I understand the tax portion will be paid from the difference of the sale value and the cost basis. This account is being held at Vanguard and I have explored their website trying to determine the cost basis. For example, I opened the account and it solely consisted of Total Stock Market. That was 5+ years ago. During that time we made consistent purchases of shares.....so is the cost basis the price of the shares of when I opened it? Or does it apply to each "batch" of shares we purchased during that time? I have a feeling it is the latter. So if so, I don't see an option on Vangaurd that would allow me to sell shares I have held for over a year. The option I see is I can sell in a dollar amount or a share amount.....but who's to say those shares I am selling wasn't purchased last week compared to years ago?
Yes, it’s the latter. Did you reinvest dividends too?
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Re: Withdrawal from taxable account question.

Post by KingRiggs »

bearwithme wrote: Mon Nov 22, 2021 1:14 pm Again, thank you all for all your replies and the tools provided. As always, BH's have provided me a great opportunity to learn something new.



I understand the tax portion will be paid from the difference of the sale value and the cost basis. This account is being held at Vanguard and I have explored their website trying to determine the cost basis. For example, I opened the account and it solely consisted of Total Stock Market. That was 5+ years ago. During that time we made consistent purchases of shares.....so is the cost basis the price of the shares of when I opened it? Or does it apply to each "batch" of shares we purchased during that time? I have a feeling it is the latter. So if so, I don't see an option on Vangaurd that would allow me to sell shares I have held for over a year. The option I see is I can sell in a dollar amount or a share amount.....but who's to say those shares I am selling wasn't purchased last week compared to years ago?
You need to understand which cost basis method you have selected for your account. Here is a link to Vanguard's explanation:

https://investor.vanguard.com/taxes/cost-basis/methods

You can change your cost basis method under the "settings" tab.

For most control (ie, selling specific lots or "batches" as you say, it is usually recommended to select "Specific Identification (SpedID)".

Hope this helps.
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increment
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Re: Withdrawal from taxable account question.

Post by increment »

bearwithme wrote: Mon Nov 22, 2021 1:14 pm who's to say those shares I am selling wasn't purchased last week compared to years ago?
You and Vanguard need to decide on which batches, a.k.a. "lots," prior to when your sales of shares "settle" (which happens two days after the trading event). It is good that you are thinking about this ahead of time. See that link in KingRiggs's post above.
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bearwithme
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Re: Withdrawal from taxable account question.

Post by bearwithme »

delamer wrote: Mon Nov 22, 2021 1:21 pm Did you reinvest dividends too?
Correct.
dbr
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Re: Withdrawal from taxable account question.

Post by dbr »

increment wrote: Mon Nov 22, 2021 2:16 pm
bearwithme wrote: Mon Nov 22, 2021 1:14 pm who's to say those shares I am selling wasn't purchased last week compared to years ago?
You and Vanguard need to decide on which batches, a.k.a. "lots," prior to when your sales of shares "settle" (which happens two days after the trading event). It is good that you are thinking about this ahead of time. See that link in KingRiggs's post above.
Yes, and trying somehow to sell certain lots and then after the fact claim taxes by identifying different lots is tax fraud.

It use to be the investor had to get a letter from the broker specifying exactly what instructions the investor made at the time of sale. I suppose with covered shares the 1099 will be correct. I am not sure what rules might apply to uncovered shares.
delamer
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Re: Withdrawal from taxable account question.

Post by delamer »

bearwithme wrote: Mon Nov 22, 2021 2:32 pm
delamer wrote: Mon Nov 22, 2021 1:21 pm Did you reinvest dividends too?
Correct.
Then you may have many small lots.
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Keith5337
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Re: Withdrawal from taxable account question.

Post by Keith5337 »

If I remember correctly, there are 10 years of statements available on Vanguard's website. Download those now before the next year is dropped from the system m
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bearwithme
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Re: Withdrawal from taxable account question.

Post by bearwithme »

delamer wrote: Mon Nov 22, 2021 4:38 pm
bearwithme wrote: Mon Nov 22, 2021 2:32 pm
delamer wrote: Mon Nov 22, 2021 1:21 pm Did you reinvest dividends too?
Correct.
Then you may have many small lots.
Correct again. I was able to download all my transactions into a PDF form from Vanguard this afternoon and then exported it into an Excel spreadsheet to work with it more easily. Here is what I have done so far and just want to make sure I my thinking is correct.

In the data from Vanguard it provides me with the amount I contributed, price per share at the time of the transaction, and the number of shares that were purchased for each transaction. I created a new column that I entered in the current price per share for the Total Stock Market fund. To calculate the capital gain per transaction I multiplied the amount of shares for a specific transaction by the current price per share and then with that total I subtracted the amount I contributed for that specific transaction. I did this for every transaction that would be classified as a long term capital gain. Once completed I added the total of these calculations and multiplied that by the percentage I believe I would be taxed based off the information given earlier (0%, 15%, or 20%). Is this the correct approach?
clip651
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Re: Withdrawal from taxable account question.

Post by clip651 »

What cost basis method have you selected at Vanguard? It's very important to get that the way you want it before you sell anything in your taxable account.
jw50
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Re: Withdrawal from taxable account question.

Post by jw50 »

For funds, do you need to substract tax already paid for capital distributions? Does the plateform automatically work that out for you?
dbr
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Re: Withdrawal from taxable account question.

Post by dbr »

jw50 wrote: Wed Nov 24, 2021 9:13 am For funds, do you need to substract tax already paid for capital distributions? Does the plateform automatically work that out for you?
No. If you reinvest the distribution that becomes its own new tax lot with its own gain whatever it is. If don't reinvest the distribution than the cost basis stays the same for the existing lots. What a distribution does do is reduce the NAV at the time so the taxable gain goes down at that moment. You may never see that in the numbers as the price changes every day anyway,
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bearwithme
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Re: Withdrawal from taxable account question.

Post by bearwithme »

clip651 wrote: Wed Nov 24, 2021 8:54 am What cost basis method have you selected at Vanguard? It's very important to get that the way you want it before you sell anything in your taxable account.
It's currently set at average cost..... selling funds is not happening in the next week or so. In the next year, possible. We are just preplanning for the future so I can adjust this?
dbr
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Re: Withdrawal from taxable account question.

Post by dbr »

bearwithme wrote: Wed Nov 24, 2021 3:32 pm
clip651 wrote: Wed Nov 24, 2021 8:54 am What cost basis method have you selected at Vanguard? It's very important to get that the way you want it before you sell anything in your taxable account.
It's currently set at average cost..... selling funds is not happening in the next week or so. In the next year, possible. We are just preplanning for the future so I can adjust this?
You can change the cost basis method as long as you settle on what you want before you make any sales.
clip651
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Re: Withdrawal from taxable account question.

Post by clip651 »

If you want full control over what lots you want to sell, you generally will want SpecID.

If you think you want that, I would consider going ahead and switching it sooner than later. And then going back to your taxable account and looking at how the lots display with SpecID, and asking questions here about how it all works once it displays like that. I normally only sell for tax loss harvesting (so my moves are not really cashing out, but I still end up selling shares to buy something else in the same account). I have my taxable account set to SpecID, and I can see the amount of gains or losses on each lot anytime I like.

Assuming you want SpecID (there are other options, and others here would be better at explaining the ins and outs of each of them than me), I personally think it's best to get it set up, and get used to viewing all your lots that way, well in advance of selling. Then when you do decide to sell, you won't have to wait for any changes to take effect.

If you start selling while you have average cost selected, I think you will have trouble doing anything else going forward in that account. So you don't want to accidentally sell anything while you have average cost selected, unless average cost is what you want. There are reasons some people prefer average cost. But if you want control over which lots you sell to control how much gains you realize when you sell, average cost is probably not what you want for your situation.

cj
dbr
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Re: Withdrawal from taxable account question.

Post by dbr »

You can't start selling using average basis and then go back and pretend you had picked by tax lots without committing tax fraud, not that anyone is suggesting that.

There is some information here: https://investor.vanguard.com/taxes/cost-basis/methods , including the comment:

"*If average cost was previously used, the shares you acquired before the method change may be locked with the average basis. By law, to revoke the average basis, you must change your cost basis method before the first sale, transfer, or disposition."

For more information on tax handling of investments Fairmark is a good source:

https://fairmark.com/investment-taxatio ... tax-guide/
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